Three years ago, as the region and nation were still in the grip of the Covid-19 pandemic, hospitals in the Conejo, Simi, San Fernando, Santa Clarita and Antelope valleys were hurting, with more than three-fourths reporting they were losing money.
The financial condition of local hospitals improved last year – but only slightly. Eleven of the 21 hospitals on the Business Journal’s list of area hospitals ranked by net patient revenue reported they lost money last year. The list is based on data compiled by the state Department of Healthcare Access and Information.
But local hospital executives and industry representatives say that may be about as good as the situation gets for local hospitals. A confluence of factors – including state-mandated increases in hourly wages for health care workers and the local impact of massive cuts to the federal Medicaid program – are poised to once again tighten the financial squeeze at local hospitals.
“We may be in the black today, but if I look into the future, it’s going to be increasingly challenging to stay there,” says Kevin Klockenga, chief executive of Henry Mayo Newhall Hospital in Valencia.
The hospital, which has 357 licensed beds, reported a positive operating margin of 5% last year, a turnaround from a negative 4% margin in 2022.
Pandemic perfect storm
The overall financial condition of local hospitals has always been precarious, especially for “safety-net” hospitals where most of the patients are on Medicaid and other government-funded health care programs – if they have any insurance at all.
During the pandemic, hospitals in the five-valley area and throughout the nation were slammed with huge increases in very sick patients, shortages and skyrocketing costs for personal protective equipment, and an acute nursing shortage led to increased reliance on “travel nurses” who commanded pay rates up to three times higher than union-scale nurses. All this while there was little or no revenue coming in from elective surgeries, the principal revenue generator for most hospitals.
The situation was so dire that the California Hospital Association requested $1.5 billion in emergency funding from the state Legislature. In the end, the state authorized $300 million for a loan program for financially distressed hospitals.
The extra payments did help a bit for 2024, as did a recovery in elective surgeries once the pandemic fears receded.
“Our financial situation has improved,” says Ed Mirzabegian, chief executive of Antelope Valley Medical Center in Lancaster. “We were helped by a higher volume of patients as nearly all of the elective surgery procedures have come back. That has been generating considerable revenue.”
But at Henry Mayo Newhall Hospital, chief executive Klockenga says the turnaround was only possible because hospital executives cut 120 positions from the total of about 1,800.
“We were losing about $2 million a month back in 2022,” he says. “Since about 80% of our total cost is related to labor, there’s no way to get out of a situation like that without cuts.”
He notes that some of the people working in those positions were reassigned, though many lost their jobs altogether.
Klockenga adds that the hospital still relies on about 100 travel nurses. And while their rates have come down from quadruple the union pay scale three years ago, he says they are still charge about 50% more than what the hospital pays for its own unionized nurses.
Financial pressures
Faced with ongoing financial pressures, many hospitals have cut some of their most unprofitable service lines. Topping the list is closing of maternity wards, which are considered among the least profitable service offerings, thanks to a long-term decline in the number of births and expensive equipment and labor costs.
“We’ve definitely seen an uptick in service line cuts,” says Justin Ziombra, the California Healthcare Association’s group vice president of data analytics. “This is especially concentrated in maternity and delivery services and delivery services and NICU’s (neonatal intensive care units).”
Earlier this year, the association released a report showing that roughly 50 maternity wards have closed statewide over the last decade.
Locally, two hospitals shuttered their maternity wards last year: USC Verdugo Hills Hospital in Glendale and Adventist Health Simi Valley Hospital.
Over the next four years, the financial squeeze on hospitals is expected to return. The state has enacted huge increases in the minimum wages for health care workers, with all hospitals having to pay their workers $25 an hour by 2028.
Meanwhile, the U.S. Congress enacted in July massive cuts to the Medicaid health care program for low-income Americans. Nearly 12 million people are forecast to lose Medicaid coverage nationwide over the next 10 years. That means more uninsured patients will be turning to hospitals for their health care. And the gap between per patient medical costs and reimbursement rates from the Medicaid program is expected to continue to widen.
David Simon, spokesman for the California Hospital Association, says the lower reimbursement rates from Medi-Cal could cost the state’s hospitals up to $120 billion a year.
Locally, Klockenga at Henry Mayo Newhall Hospitals says his hospital has only just begun analyzing the impact of Medi-Cal cuts. He notes there are many variables to consider, including whether and how much the state backfills some of the lost Medicaid coverage and reimbursement cuts.
“Given the state’s track record, I’m not confident at all that we’ll get much help from the state Legislature here,” he says.
Meanwhile, he notes one more huge cost looming: seismic retrofitting to meet a 2030 state mandate that hospital facilities be able to stay up and running following a major earthquake.
“That’s going to cost us $30 million to $40 million,” he says. “With all of these other costs going up and no revenue increases, where are we supposed to come up with that money?”
